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29 • 2024

Accounting Firm Exemption From FinCEN Reporting Applies to Almost None

As of January 1, 2024, the federal Corporate Transparency Act (“CTA”)[1] and its implementing regulations adopted by the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury[2] now require that millions of small businesses (“reporting companies”) formed or registered after that date file with FinCEN certain beneficial ownership information (“BOI”) about the reporting company, its beneficial owner or owners, and the company applicant who files the formation or registration document with the applicable state or tribal regulatory body.[3] In addition, tens of millions of existing business entities formed before January 1, 2024 are also required to file information about the reporting company and its beneficial owner or owners with FinCEN by January 1, 2025.[4]

The CTA and FinCEN’s implementing regulations (the “BOI Reporting Rule”) are aimed at requiring small businesses to provide information about their beneficial owners and incorporators to FinCEN to be maintained in a central federal repository as a tool to prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illegal activity.[5] The stated rationale behind the CTA and the BOI Reporting Rule is that most U.S. jurisdictions do not currently require information about the beneficial owners of small business entities such as closely held corporations and limited liability companies, thereby permitting criminal actors to hide behind such entities when dealing with legitimate financial institutions and others.[6] The CTA and the BOI Reporting Rule thus require reporting companies to provide the specified BOI to FinCEN to close that information gap.[7]

Because the idea is to obtain information about the many millions of small businesses that do not already report their BOI, the CTA exempted from the definition of “reporting company” 23 specific types of entities, many of which are already subject to substantial federal and/or state regulation or already have to provide their BOI to a governmental authority.[8] The exemption we are examining in this article is for “public accounting firms.”

Under the CTA, an entity falls into this category, and is therefore exempt from reporting, only if the entity is “a public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7212).”[9] Section 102 of the Sarbanes-Oxley Act of 2002 requires that a “public accounting firm” must register with the Public Company Accounting Oversight Board (“Board” or “PCAOB”) in order “to prepare or issue, or to participate in the preparation or issuance of, any audit report with respect to any issuer, broker, or dealer.”[10] The PCAOB is a nonprofit corporation established by Congress to oversee the audits of public companies that are subject to the federal securities laws, as well as brokers and dealers registered with the Securities and Exchange Commission.[11] A “public accounting firm” is defined as “a proprietorship, partnership, incorporated association, corporation, limited liability company, limited liability partnership, or other legal entity that is engaged in the practice of public accounting or preparing or issuing audit reports.” [12] To be registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002, a public accounting firm must file with the PCAOB an application for registration including specified information such as the names of all issuers, brokers, and dealers for which the firm prepared or issued audit reports during the immediately preceding calendar year, and for which the firm expects to prepare or issue audit reports during the current calendar year; the annual fees received by the firm from each such issuer, broker, or dealer; a statement of the firm’s quality control policies for its accounting and auditing practices; a list of all accountants associated with the firm who participate in or contribute to the preparation of audit reports; and information relating to criminal, civil, or administrative actions or disciplinary proceedings pending against the firm or any associated person of the firm in connection with any audit report.[13] The PCAOB can then decide to approve or disapprove the firm’s application for registration.[14] FinCEN has estimated that the number of public accounting firms registered with the PCAOB as of 2024 is less than a thousand.[15]

In sum, only public accounting firms that are involved in the preparation or issuance of audit reports for issuers, brokers, or dealers subject to the federal securities laws, and are therefore registered with and overseen by the PCAOB, are exempt from reporting their BOI to FinCEN. Accounting firms that are not registered with the PCAOB must comply with the BOI reporting requirements, unless they qualify for one of the other exemptions from the definition of “reporting company” in the CTA.

[1] The CTA is codified at 31 U.S.C. § 5336.

[2] FinCEN’s final rule implementing the reporting requirements of the CTA is codified at 31 C.F.R. § 1010.380. For a general description of the rule, see eMinutes, FinCEN Reporting — Yes It Is Really Happening (Feb. 23, 2023).

[3] See 31 C.F.R. § 1010.380(a)(1)(i), (ii), (b).

[4] See id. § 1010.380(a)(iii), (b). The U.S. House of Representatives has passed a bill that would extend to January 1, 2026 the deadline for reporting companies formed before January 1, 2024 to file their initial report with FinCEN, but the Senate has not taken any action on the bill as of this time. See eMinutes, FinCEN Beneficial Ownership Information Reporting Deadlines (Jan. 15, 2024).

[5] See FinCEN, Beneficial Ownership Information Reporting Requirements, 87 FR 59,498 (Sept. 30, 2022) [hereinafter referred to as the “Adopting Release”].

[6] See Adopting Release, supra note 5, 87 FR at 59,498 to 59,499.

[7] For a general description of what information has to be reported to FinCEN and when, see eMinutes, “FinCen Deadline Extended for New Companies to Report” (Sept. 27, 2023); eMinutes, “FinCEN Reporting — Yes It Is Really Happening” (Feb. 23, 2023).

[8] See 31 U.S.C. § 5336(a)(11)(B)(i)-(xxiii); Adopting Release, supra note 5, 87 FR at 59,539. The full list of exempt entities includes “securities issuers, domestic governmental authorities, banks, domestic credit unions, depository institution holding companies, money transmitting businesses, brokers or dealers in securities, securities exchange or clearing agencies, other entities registered pursuant to the Securities Exchange Act of 1934, registered investment companies and advisers, venture capital fund advisers, insurance companies, state licensed insurance producers, entities registered pursuant to the Commodity Exchange Act, [public] accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax exempt entities, entities assisting tax exempt entities, large operating companies, subsidiaries of certain exempt entities, and inactive businesses.” Adopting Release, supra note 5, 87 FR at 59,539 n. 186.

[9] 31 U.S.C. § 5336(a)(11)(B)(xv); accord 31 C.F.R. § 1010.380(c)(2)(xv).

[10] 15 U.S.C. § 7212(a). The terms “issuer,” “broker,” and “dealer” are defined primarily by reference to the definitions of those terms in other provisions of the federal securities laws. See id. §§ 7201(7) (definition of “issuer”), 7220(3) (definition of “broker”), 7220(4) (definition of “dealer”). Most generally, an “issuer” is “any person who issues or proposes to issue any security” regulated under federal law, id. § 78c(a)(8); a “broker” is “any person engaged in the business of effecting transactions in securities for the account of others,” id. § 78c(a)(4)(A); and a “dealer” is “any person engaged in the business of buying and selling securities … for such person’s own account through a broker or otherwise,” id. § 78c(a)(5)(A).

[11] See 15 U.S.C. § 7211; Public Company Accounting Oversight Board, About.

[12] 15 U.S.C. § 7201(11)(A); accord Public Company Accounting Oversight Board, Bylaws and Rules, Rule 1001(p)(iii).The term “public accounting firm” also includes, “to the extent so designated by the rules of the Board, any associated person of any [such] entity.” 15 U.S.C. § 7201(11)(B). The rules of the Board define a “person associated with a public accounting firm” to mean “any individual proprietor, partner, shareholder, principal, accountant, or professional employee of a public accounting firm, or any independent contractor or entity that, in connection with the preparation or issuance of any audit report –  (1) shares in the profits of, or receives compensation in any other form from, that firm; or (2) participates as agent or otherwise on behalf of such accounting firm in any activity of that firm; provided, however, that these terms do not include a person engaged only in clerical or ministerial tasks[.]” Public Company Accounting Oversight Board, Bylaws and Rules, Rule 1001(p)(i).

[13] 15 U.S.C. § 7212(b); PCAOB, Form 1: Application for Registration.

[14] 15 U.S.C. § 7212(c).

[15] See Adopting Release, supra note 5, 87 FR at 59,567.